Monday, July 21, 2014

Brace for the rough socio-economic challenges

21/07/2014 - 09:30      

Ng Kee Seng

OUTSPOKEN: On July 10, Bank Negara announced the raising of the benchmark overnight policy rate (OPR) by 25 basis points (bps), or 0.25 percentage point, to 3.25 per cent.
Many media reports expressed surprise at the first interest rate hike in three years and others questioned the timing.
The central bank’s decision to raise interest rate should not be a surprise because it was expected and it was only a matter of crunch time.
Clearly, the central bank’s OPR hike is aimed at reducing the risks of economic and financial imbalances by curbing rising household debt.
The last interest rate hike was made in 2011 and an unabated rising household debt can only drown an economy.
No country’s fiscal policy can sustain forever to drive its economy when over lending and over spending hit the ceiling.
Malaysia’s household debt at 86 per cent is the second highest in Asia. Bank Negara has no choice but to raise interest rate to slow household debt growth and combat speculative activities in the market.
Rightly so, the OPR hike means, in simplistic terms, everything will cost more now in Malaysia.
And Malaysians have not yet been hit by the damning domino effects of rising costs of living from an expected rise in oil prices and next April’s Goods and Services Tax (GST).
Also, Malaysians are hearing talk of a hike in the price of electricity tariff.
No wonder the property market has slowed down significantly with Malaysians generally talking and speculating that dwellings costing RM800,000 and above are expected to be the worst hit by the last quarter of this year.
The rising cost of living means the majority of Malaysians will have less cash to spend or spare. They obviously also cannot afford to commit to borrowings to buy new cars or properties.
In addition, the OPR hike also raises housing loan instalments by about three per cent.
As it is, the prices of new dwellings being developed are grossly over-priced.
So-called high-end property developments located in “rural” areas like Semenyih, Broga and Mantin (Negri Sembilan), to name a few, are priced RM800,000 and above.
Malaysians already know what is happening in the property markets in metropolitans in Penang, the Klang Valley and Johor.
Wage earners simply cannot afford urban properties.
Property valuers obviously find it impossible to concur with the prices that developers are demanding, thus banks are now taking precautions to look after their interests and are only able to provide as low as 60 per cent end-financing.
How do one expect wage earners to come up with the 40 per cent down payment, legal and insurance fees, etc for properties priced RM800,000 and above?
So, Malaysians can only brace themselves, meaning be prepared mentally or emotionally to face the unpleasant socio-economic depressing times.
That is the potential domestic socio-economic nightmare Malaysians must be prepared to endure, but for how long?
The global economic outlook is no better and anything can happen.
Will there be another round or two of interest rate hikes? Or, as some economists believe, Bank Negara may lower the OPR after clearer economic conditions or signals.
It cannot be ignored that since Malaysia's household debt has reached 86%, Bank Negara thus signalled to the market by raising interest rate to slow the growth of household debt.
Combating speculative activities in the market and reducing the imbalances in asset prices are also the objectives of Bank Negara. The hike could reduce excessive borrowing.
In addition, since the GST is scheduled to be implemented next year, Bank Negara must also get prepared for possible inflation. Therefore, after enjoying low interest rate for a long period, we should get prepared for the impacts brought by interest rate hike.
Needless to say, the operating costs of businesses will also head north, thereby affecting all goods and services in the country.
With no increase in wages and salaries expected, the economic misery of Malaysians will also widen and deepen as small and medium enterprises (SMEs) struggle to keep afloat and ride out the rough and tough times.
Can the Umno-led Barisan Nasional government help ease the misery expected to befall the majority of the rural and urban poor nationwide?
Just be prepared to help yourself to ride through the rough terrain.
Ng Kee Seng believes that God helps those who help themselves. In a healthy democracy, every Malaysian has a role in politics and nation-building.

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